The Custom-House

Greenspan's complicity in the social

Greenspan's complicity in the social security mess

Earlier this week Alan Greenspan, Chairman of the Federal Reserve system, testified before the House Committee on the budget. His comments on the need for social security reform attracted the headlines.

"...One change the Congress could consider as it moves forward on this critical issue is to replace the current measure of the "cost of living" that is used for many purposes with respect to both revenues and outlays with a more appropriate price index...

Another possible adjustment relates to the age at which Social Security and Medicare benefits will be provided. Under current law, and even with the so-called normal retirement age for Social Security slated to move up to 67 over the next two decades, the ratio of the number of years that the typical worker will spend in retirement to the number of years he or she works will rise in the long term. A critical step forward would be to adjust the system so that this ratio stabilizes. A number of specific approaches have been proposed for implementing this indexation, but the principle behind all of them is to insulate the finances of the system, at least to a degree, from further changes in life expectancy..."

Edward Lotterman points out that Greenspan is implicated in our current difficulties:

"Federal Reserve Chairman Alan Greenspan does well to address, at the end of his career, problems that he did not have the guts to take on 21 years ago when he still was campaigning for a major federal appointment.

While many of the suggestions Greenspan made Wednesday now make sense � despite still likely being politically unpopular � one should know the chairman's history on this issue, how he avoided the unpopular road 21 years ago, and how we're paying for those decisions today...."

Read the rest.

Candy makers fleeing the country

Protection for sugar producers is causing candy makers to flee the country - Lynne Kiesling has the story.

How can we possibly compete

How can we possibly compete against low-cost foreign labor?

Peter Gallagher explains. Also enjoy Virginia Postrel, who points out that you can look at the integrated U.S. economy as a model of the world economy with free trade, free migration, and free capital flows.

"SUPPOSE we lived in an economic world with no borders, where goods, capital and people could move anywhere.

We've all heard the dire predictions of what would happen. All the businesses and jobs would rush to the places with the lowest wages. The poor countries would get richer, but only by making rich countries poorer.

Eventually we'd all be roughly equal, but formerly well-to-do Americans would be a lot worse off. Many Americans are afraid that globalization and free trade will have exactly this effect..."

But it hasn't in the U.S., despite wide historical disparities in incomes among states.

The Suskind archive of Bush

The Suskind archive of Bush administration papers

A few weeks ago Ron Suskind's book on Bush Administration decision making, The Price of Loyalty was released. Suskind's book depended heavily on the recollections of fired Bush Treasury Secretary, Paul O'Neill, and on 19,000 internal administration papers that O'Neill gave him.

Suskind is now publishing selections from the papers on his web page.

Brad DeLong comments on one of these papers, a memo from Treasury Undersecretary Peter Fisher to Treasury Secretary Paul O'Neill" on a meeting with the President and Vice-President on corporate governance reforms here:"A Professional Job of Walking on Eggshells".

Making economics even better Economics

Making economics even better

Economics isn't a finished product. It's evolving and moving forward. Right now it's incorporating a more sophisticated psychology. Matthew Rabin of Berkeley has been an important figure in this process. Here's an interview with Rabin on what psychology has to offer. Key economic approaches are kept:

" Q: Economists usually assume that each person knows what she wants, and that these preferences don't conflict with each other and don't change much over time, and that s/he "rationally maximizes" those preferences. What have we learned from Psychological Economics that challenges this? Have you found that this isn't necessarily true? No, virtually all of that is substantially true, and nothing in my work, or that of other behavioral economists, says that this is not true. It's just not the whole truth. The pioneers of Psychological Economics, people like (Danny) Kahneman and (Amos) Tversky, thought people were very rational, that virtually all human decision making and judgement is driven by reasonable heuristics-people trying to be smart, trying to think intelligently about what they're doing, but in certain types of things people screw up and make mistakes."

So economists are right that people behave purposefully - but their psychological premises are incomplete or mistaken. That means that models can't explain a lot of things that are really interesting - or get things wrong.

"Q: There is another area that you are looking at-how people systematically evaluate their self-interest differently from the way we might think they do. The time-preference, self-control issue, is an area that I'm working on with Ted O'Donoghue. In many ways it may be the most active area for research in economics because it's been formalized. We're starting to understand some of the principles, and it's so right. The phenomenon is about how we trade off well-being one day to the next. When those two days are today and tomorrow, we care a whole lot more about our well-being today than we do about our well-being tomorrow. But you wouldn't say to yourself "Hmm, I could do something 300 days from now or I could do something 301 days from now. Sure it would be a little bit more effort if I did it 301 days from now, but I really don't feel like doing it 300 days from now." People don't think like that. Three hundred days from now and 301 days from now are the same, as far as you're concerned. But if you were choosing between today and tomorrow, even though you know it may be a little bit more effort if you put if off until tomorrow than it would be if you did it today, you still have this gut instinct to put if off until tomorrow, or if it's some pleasurable activity, you have a tendency to do it today.
We call this "time inconsistent preference," and it's hard to convey how categorically, how unambiguously economists have been wrong about this. Economists have assumed a time-consistent discounting, that to whatever degree we care more about today than tomorrow, we care that same amount more about 7 days from now than about 8 days from now. Every single study done by psychologists, studying humans, rats, pigeons, always shows this other kind of discounting, this hyperbolic discounting which captures time-inconsistent preferences, the fact that we care much more about today than tomorrow, that that's a bigger difference to us than how much more we care about 7 days from now vs. 8 days from now. This alternative notion about the way people discount pleasures and pains and make trade-offs between time periods has been formalized and, as you might think, it matters immensely in economics.

Q: This seems to go against the whole notion of a constant discount rate, which we apply as a constant over as long a time period as we want.
The notion that the discount between one day and another is independent of whether that day is now or in the future is just wrong. The idea of time inconsistent behavior can help explain credit card behavior which, if you look at the data on credit card behavior in the United States, is nuts. (We as economists are trained not to be judgmental about people's behavior, but the amount of interest people pay on their credit cards is nuts.) The amount of debt Americans have, and the amount they're paying interest on, is truly phenomenal. There's a trillion dollar industry in people making these very weird tradeoffs, people paying 18 or 19% interest on these debts, implicit in which is this tremendous time preference for consumption now versus later that is not consistent with people's own long-run preferences. People don't wish upon themselves that they be borrowing so much in the future, and they probably swear to themselves that they'll stop doing this. This can help explain that type of behavior and, more generally, the consumption-savings tradeoff--why people arguably save too little."

The site with the interview has links to a lot of Rabin's papers. You may also want to try Rabin's home page. I learned about this from Tyler Cowen.

Jagdish Bhagwati's new book Trade

Jagdish Bhagwati's new book

Trade Theorist and free trade advocate Jagdish Bhagwati has a new book, In Defense of Globalization from Oxford University Press. The Council on Foreign Relations site on the book has an abstract, a table of contents, and a PDF file of the first chapter. The book is available for about $20 from Amazon.

The Council also provides links to a Bhagwati op-ed from Feb 15, "Why Your Job Isn't Moving to Bangalore", and an Bhagwati interview, "Council's Top Trade Expert Knocks 'Protectionism' of Gephardt and Dean" The Gephardt and Dean references suggest the interview content is dated, but this isn't so. Here Bhagwati describes late Clinton Administration and Bush Administration trade efforts:

"There was a huge difference between the World Trade Organization's ministerial meeting in Seattle in 1999 and [the WTO meeting in] Cancun last year. President Clinton, by the time he got to Seattle, was probably exhausted from the Uruguay Round [of trade negotiations] that finally culminated with an accord in 1994 and NAFTA battles that continued throughout his time in office. His advisers and he had not thought through the implications of going to Seattle, and the incoming reports of all these demonstrations against "globalization" being planned had not registered. Clinton did not manage it well.

By contrast, Bush came into office wanting to succeed in the Doha round of trade talks. His special trade representative, Robert Zoellick, had actively sought to get the Doha talks launched in Qatar right after 9/11. Then at Cancun, the first ministerial meeting after Doha, one of the sticking points was intellectual property protection for pharmaceuticals. There had been tough restrictions on what could be done by third world countries to supply [drugs to] other third world countries that do not have manufacturing capacity. Restrictions like that did not sit well with a lot of developing countries, and the non-governmental organizations [NGOs] that advised them were up in arms.

We were being denounced by the NGOs and the developing countries. The United States, under pharmaceutical lobby pressure, held out against making the necessary adjustments or concessions. I was convinced that President Bush in the end, more than on any other lobbying issue, would be able to get the drug companies to make concessions: after all, it meant bringing together less than ten CEOs and bribing or threatening them to agree to the necessary concessions, a task that was far more simple than getting numerous powerful lobbying interests in sectors such as agriculture to accept compromises. I was looking therefore to see if we would make the requisite TRIPs/medicines concession at Cancun: that would be a surefire signal that President Bush wanted to make headway in the Doha negotiations. And the administration did mange to make that concession.. That's when I felt that the president was serious about the Doha Round and about ensuring a successful conclusion to this multilateral effort at freeing trade."

Here he voices uncertainties about the impact of agricultural trade liberalization on poor nations:

"Can free trade genuinely help the poorest countries?

That's my big concern. There is a difference between the openness of our market and the penetrability of that market. What worries me is whether we can do very much for African exports: for instance, if we open the doors and New Zealand, Argentina, Brazil, and Thailand all get into the markets, but African countries are unable to [compete]. The second problem is that a lot of countries will continue being importers of food. Right now, 42 of the 49 so-called least developed countries are importers of food and agricultural products. The assumption is that if we remove subsidies and raise agricultural prices, somehow they will be able to export to us. That's not so clear. I am accused of being the world's No. 1 free trader, but I know enough about the subject to know that if two people liberalize, a third might be hurt."

There are lots of other interesting questions and answers.

Fragile Russian boom? Abiola reminds

Fragile Russian boom?

Abiola reminds us how dependent recent Russian economic growth is on oil prices.

Public administration gone bad Abiola

Public administration gone bad

Abiola gives us "Just a few things to keep in mind when evaluating calls for government to "do something!" "

Patents and competition policy Jason

Patents and competition policy

Jason Soon links to an Federal Trade Commission (FTC) paper on the the relationship between antitrust and patent policy, and to a paper by Daniel Rubinfeld and Robert Maness on "The Strategic Use of Patents: Implications for Antitrust," and offers commentary, in "Patent scepticism".

"Big Sugar"

The Bush Administration exempted sugar from the recent bilateral trade liberalization agreement with Australia.  But why did it imperil the agreement to preserve an obstacle to trade that benefits relatively few Americans and only imposes costs on most of them?  Aaron Lukas provides a brief review in "A Sticky State of Affairs: Sugar and the U.S.-Australia Free-Trade Agreement".

"...The U.S. sugar program is a classic case of concentrated benefits and diffused costs. A very small number of sugar growers receives enormous benefits, while the costs of providing those benefits are spread across the U.S. economy. Consequently, U.S. sugar producers have a very strong incentive to lobby and fund campaigns of U.S. policymakers. And they have done so. Dominated largely by two companies in Florida (Flo-Sun and U.S. Sugar), the sugar lobby has been a major financial contributor to incumbent politicians. In the 2000 election cycle, for example, Flo-Sun, owned by the wealthy Cuban-American Fanjul family, contributed $690,750 in "soft money" to both the Democrats and the Republicans and $78,200 in direct funds to candidates and the parties. [13] Overall, the U.S. sugar industry contributed $7.2 million to political action committees and $5.7 million in soft money donations, for a total of $13 million�a bargain in exchange for protection worth hundreds of millions..."

("Big Sugar" is Lukas' expression)

Tariff-rate quotas are one of our key defenses against foreign sugar.  These are described in detail by David Skully in the US Department of Agriculture report, "Economics of Tariff-Rate Quota Administration".